# Money and Banking Notes, Class 12 Economics | SwaVid Money and Banking, NCERT Class 12 Economics: notes with key ideas, definitions, common mistakes and 3 quick checks with worked answers. Canonical: https://www.swavid.com/cbse/class-12/economics/chapter/money-and-banking Source: https://www.swavid.com/cbse/class-12/economics/chapter/money-and-banking # Money and Banking ## Definitions, formats and formulas ## Key ideas ## Common mistakes ## Quick checks ## Keep going ## Questions parents ask ## Class 12 Economics on SwaVid ### Functions of money ### Demand for money ### Supply of money and its measures ### Credit creation by commercial banks ### Central bank and its functions ### Monetary policy instruments ### Next chapter ### Related chapter ### All chapters SwaVid › CBSE › Class 12 › Economics › Money and Banking Notes written by SwaVid from the NCERT textbook. Class 12 Economics, Chapter 3. Key ideas, definitions and common mistakes. CBSE does not print marks for a single chapter. Short answer. This chapter explains the functions of money, how commercial banks create credit, and how the central bank manages money supply. Students learn the measures of money supply and the policy tools used by the Reserve Bank of India to regulate liquidity in the economy. Source: NCERT Introductory Macroeconomics (Reprint 2026-27) , Chapter 3, Money and Banking Money acts as a medium of exchange, removing the need for a double coincidence of wants found in barter systems. It also serves as a common unit of account, a store of value, and a standard for deferred payments. People hold money for transaction purposes to carry out day-to-day purchases, which depends directly on nominal income. Money is also held for speculative motives, where the demand for liquid cash varies inversely with the market rate of interest. Money supply is the total stock of money in circulation among the public at a given point in time. The Reserve Bank of India publishes four monetary aggregates: M1, M2, M3, and M4, ranging from most liquid to least liquid. Commercial banks accept deposits and extend loans, keeping only a fraction as reserves known as the Legal Reserve Ratio (LRR). Through repeated rounds of lending and redepositing, banks create total deposits that are a multiple of initial primary deposits. The Reserve Bank of India is the apex monetary institution that issues currency notes, acts as a banker to the government, and serves as a banker and supervisor to commercial banks. It also acts as the lender of last resort. The central bank regulates credit using quantitative tools such as the repo rate, reverse repo rate, cash reserve ratio (CRR), statutory liquidity ratio (SLR), and open market operations (OMO). It also uses qualitative tools like margin requirements and moral suasion to channel credit. Try each question first. Then tap it to see the answer. Money multiplier = 1 / LRR = 1 / 0.20 = 5 Total credit created = Initial deposit × Money multiplier = ₹ 1,000 crore × 5 = ₹ 5,000 crore ₹ 5,000 crore M1 = Currency with public + Demand deposits M1 = ₹ 80,000 crore + ₹ 1,20,000 crore = ₹ 2,00,000 crore Time deposits are excluded from M1 ₹ 2,00,000 crore Initial money multiplier = 1 / 0.25 = 4 New money multiplier = 1 / 0.10 = 10 Change in multiplier = 10 - 4 = 6 Increase of 6 Determination of Income and Employment . Government Budget and the Economy . The 13 chapters of Class 12 Economics . CBSE does not give marks to one chapter. It prints marks for units or parts, and the chapter list page shows them all. No. They are written by SwaVid from the NCERT textbook. The CBSE curriculum is the reference for what is assessed. Determination of Income and Employment. SwaVid is an AI tutor for Indian students in Classes 6 to 12. It finds the earlier ideas a child missed, then teaches today’s chapter. Start free to see how it works. - Ch 3 NCERT book - 80 marks, theory paper - 3 quick checks - Including inter-bank deposits in the measures of money supply . Money supply counts only money held by the public. Inter-bank deposits are claims between banks and are excluded from all aggregates like M1 and M3. - Treating time deposits as part of narrow money M1 . M1 includes only demand deposits that can be withdrawn or transferred by cheque at any time. Fixed or time deposits are included only in M3 and M4. - Confusing the repo rate with the reverse repo rate . The repo rate is the rate at which the RBI lends short-term funds to commercial banks. The reverse repo rate is the rate at which commercial banks park surplus funds with the RBI. - Confusing Cash Reserve Ratio with Statutory Liquidity Ratio . CRR is kept as deposits with the RBI, whereas SLR is maintained by banks with themselves in liquid forms like government securities or gold. ## Key Links - [CBSE](https://www.swavid.com/cbse) - [Class 12](https://www.swavid.com/cbse/class-12) - [Economics](https://www.swavid.com/cbse/class-12/economics/chapters) - [Start free →](https://www.swavid.com/signup) - [All 13 chapters](https://www.swavid.com/cbse/class-12/economics/chapters) - [NCERT Introductory Macroeconomics (Reprint 2026-27)](https://ncert.nic.in/textbook.php) - [Open notes](https://www.swavid.com/cbse/class-12/economics/chapter/determination-of-income-and-employment) - [Open notes](https://www.swavid.com/cbse/class-12/economics/chapter/government-budget-and-the-economy) - [Class 12 Economics](https://www.swavid.com/cbse/class-12/economics/chapters) - [Start free →](https://www.swavid.com/signup)